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School of Social Sciences

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BAEcon Economics
Learn how the social sciences can help you to understand today's world.

BAEcon Economics

Year of entry: 2018

Course unit details:
Advanced Macroeconomics

Unit code ECON30002
Credit rating 10
Unit level Level 3
Teaching period(s) Semester 2
Offered by Economics
Available as a free choice unit? Yes

Overview

See course Blackboard pages.

Pre/co-requisites

Unit title Unit code Requirement type Description
Mathematical Economics I ECON20120 Pre-Requisite Compulsory
Macroeconomics IIIA ECON30611 Pre-Requisite Compulsory
Macroeconomics IIIB ECON30612 Co-Requisite Compulsory
Macroeconomics IIA ECON20401 Pre-Requisite Compulsory
Macroeconomics IIB ECON20402 Pre-Requisite Compulsory
ECON10001 Pre-Requisite Compulsory
Advanced Mathematics ECON10071 Pre-Requisite Compulsory
Further Mathematics ECON20281 Pre-Requisite Compulsory
Pre-requisites: (ECON20401 & ECON20402) & (ECON10001 or ECON10071 or ECON20281) Co-Requisite: ECON30610

Aims

The course focuses on the role of information, expectations and beliefs in macroeconomic. These elements have been increasingly recognized in recent years as playing a key role in shaping macroeconomic outcomes and determining the effects of monetary and fiscal policies.


The aim of this unit is to give students an understanding of the role played by information, beliefs and expectations in macroeconomics. Alternative theories of expectations formation and information acquisition and processing will be studied, with an emphasis on their policy implications. Students will learn and understand the consequences for macroeconomic outcomes of different information structures and of different assumptions about the degree of rationality of economic agents
 

Learning outcomes

Students will acquire knowledge and understanding of:

  1. Different theories of expectations formation.
  2. Ttheir implications in terms of policy effectiveness.
  3. The problem of coordination and its implications for macroeconomics.
  4. Rationality and irrationality in markets.
  5. The role of information.

Syllabus

List of topics covered and related required readings:

 

Rational Expectations and Their Policy Implications (2 hours)

  • Thomas Sargent and Neil Wallace, 1976. Rational Expectations and the Theory of Economic Policy. Journal of Monetary Economics 2, 169–183.
  • Robert E. Lucas, 1976. Econometric Policy Evaluation: A Critique. Carnegie-Rochester Conference Series on Public Policy 1, 19–46.


Self-Fulfilling Expectations and the Business Cycle (2 hours)

  • Costas Azariadis, 1981. Self-fulfilling prophecies. Journal of Economic Theory 25, 380-396.
  • Roger E. Farmer and Michael Woodford, 1997. Self-fulfilling prophecies and the business cycle. Macroeconomic Dynamics 1, 740-769.


Self-Confirming Equilibria and Their Relevance for Policymakers (2 hours)

  • Drew Fudenberg and David K. Levine. 2009. Self-confirming equilibrium and the Lucas critique. Journal of Economic Theory 144, 2354-2371.
  • In-Koo Cho, Noah Williams and Thomas J. Sargent, 2002. Escaping Nash Inflation. Review of Economic Studies 69, 1-40.

 

Rational Inattention and Monetary Economics (1 hours)

  • Christopher Sims, 2003. Implications of Rational Inattention. Journal of Monetary Economics 50, 665-690.
  • Christopher Sims, 2010. Rational Inattention and Monetary Economics. In: Handbook of Monetary Economics, Volume 3B, North Holland.


Coordination Problems and Global Games: Bank Runs and Currency Attacks (3 hours)

  • Stephen Morris and Hyun Song Shin, 1998. Unique equilibrium in a model of self-fulfilling currency attacks. American Economic Review 88, 587-597.
  • Stephen Morris and Hyun Song Shin, 2003. Global Games: Theory and Applications. In: Advances in Economics and Econometrics (Proceedings of the Eighth World Congress of the Econometric Society), edited by M. Dewatripont, L. Hansen and S. Turnovsky; Cambridge University Press (2003).
  • http://www.princeton.edu/~smorris/pdfs/Morris-GlobalGamesTheoryandApplications.pdf.
  • George-Marios Angeletos, Christian Hellwig and Alessandro Pavan, 2007. Dynamic Global Games of Regime Change: Learning, Multiplicity, and the Timing of Attacks. Econometrica 75, 711-756.

 

Bubbles: Rational or Irrational? (3 hours)

  • Diba, B.T., Grossman, H.I., 1988. The Theory of Rational Bubbles in Stock Prices. The Economic Journal 98, 746-754.
  • Olivier J. Blanchard, 1979. Speculative bubbles, crashes and rational expectations. Economics Letters 3, 387-389. (Tutorial T6)
  • Jean Tirole, 1985. Asset Bubbles and Overlapping Generations. Econometrica 53, 1499-1528.
  • Markus K. Brunnermeier, 2008. Bubbles. In: New Palgrave Dictionary of Economics, Second Edition, 2008 (https://scholar.princeton.edu/sites/default/files/bubbles_survey_0.pdf).


Efficient Markets? (2 hours)

  • Sanford J. Grossman and Joseph E. Stiglitz, 1980. On the impossibility of informationally efficient markets. American Economic Review 70, 393–408.


Revision Class (1 hours)

Teaching and learning methods

Lectures and exercise classes.

Employability skills

Analytical skills
Problem solving
Other
Information retrieval. Presentation. Numeracy. Literacy.

Assessment methods

Method Weight
Written exam 75%
Project output (not diss/n) 25%

Feedback methods

  • Tutorials.
  • Office hours.
  • Revision sessions.
  • Discussion boards.

Recommended reading

No single textbook covers the material required in this module. We will be mainly using journal articles and papers, available through the Library or posted on Backboard. Lecture notes will also be provided.


Besides the specific (compulsory) readings listed for each class (see above), additional non-compulsory (but very interesting) readings are:

 

Books:

  • Evans, G.W., Honkapohja, S., 2001. Learning and Expectations in Macroeconomics. Princeton University Press.
  • Farmer, R.E., 1993. The Macroeconomics of Self-Fulfilling Prophecies. MIT Press, Cambridge, MA.
  • Sargent, Thomas, 1999. The Conquest of American Inflation.  Princeton University Press, Princeton.
  • Veldkamp, L., 2001. Information choice in macroeconomics and finance. Princeton University Press.

 

Journal articles: 

  • Angeletos, G. M., Pavan, A., 2007. Efficient Use of Information and Social Value of Information. Econometrica 75, 1103–42.
  • Angeletos, G.-M., La'O, J., 2013. Sentiments. Econometrica 81, 739–79.
  • Angeletos, G.-M., Werning, I., 2006. Crises and Prices: Information Aggregation, Multiplicity and Volatility. American Economic Review 96, 1720–36.
  • Anufriev, M., Hommes, C. H., 2012. Evolutionary selection of individual expectations and aggregate outcomes, American Economic Journal: Microeconomics 4, 35-64.
  • Benhabib, J., Farmer, R., 1999. Indeterminacy and sunspots in macroeconomics, in: The Handbook of Macroeconomics, John Taylor and Michael Woodford, eds., North Holland.
  • Bikhchandani, S., Hirshleifer, D., Welch, I., 1992. A theory of fads, fashion, custom, and cultural change in informational cascades. Journal of Political Economy 100, 992–1026.
  • Cass, D., Shell, K., 1983. Do sunspots matter? Journal of Political Economy 91, 193-227.
  • Cole, H., Kehoe, T., 2000. Self-Fulfilling Debt Crises. Review of Economic Studies 67, 91–116.
  • Dilip, A., Brunnermeier, M., 2003. Bubbles and Crashes. Econometrica 71, 173–204.
  • Evans, G.W., Ramey, G., 2006. Adaptive expectations, underparameterization and the Lucas critique. Journal of Monetary Economics 53, 249–264.
  • Farmer, R. E., 1990. The Lucas Critique, Policy Invariance and Multiple Equilibria. Review of Economic Studies 105, 43-60.
  • Fudenberg, D., Levine, D.K., 1993. Self-Confirming Equilibrium. Econometrica 61, 523-546.
  • Hellwig, M., 1980. On the Aggregation of Information in Competitive Markets. Journal of Economic Theory 22, 477–98.
  • Hommes, C. H., 2009. Bounded rationality and learning in complex markets. In: Handbook of Economic Complexity, Edited by J. Barkley Rosse, Jr., Cheltenham: Edward Elgar.
  • Lansing, K.J., 2010. Rational and near-rational bubbles without drift. Economic Journal 120, 1149-1174.
  • Lucas, R.E., 1972. Expectations and the Neutrality of Money. Journal of Economic Theory 4, 103–124.
  • Lux, T., 1995. Herd Behaviour, Bubbles and Crashes. The Economic Journal 105, 881-896.
  • Mackowiak, B., Wiederholt, M., 2009. Optimal Sticky Prices under Rational Inattention. American Economic Review 99, 769–803.
  • Mankiw, N.G., Reis, R., 2002. Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve. Quarterly Journal of Economics 117, 1295–328.
  • McGough, B., 2006. Shocking Escapes. Economic Journal, 116, 507-28.
  • Reis, R., 2006. Inattentive Producers. Review of Economic Studies 73, 793–821.
  • Tirole, J., 1982. On the possibility of speculation under rational expectations. Econometrica 50, 1163-1181. 

Study hours

Scheduled activity hours
Assessment written exam 1.5
Lectures 16
Tutorials 7
Independent study hours
Independent study 75.5

Teaching staff

Staff member Role
Michele Berardi Unit coordinator

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